Question

Given the results after running the simulations, describe how simulations can be used in estimating profits given the uncertainty in costs and revenue?

Answer 1

As we know simulation is used to predict or forecast future behavior of anything and help us to find what we can do to influence that behavior. Nowadays simulations are being widely used in estimating profits.The most suitable simulation for estimation method is Monte Carlo Simulation (MCS). MCS considers huge possibilities and reduce uncertainity. Before doing any analysis MCS technique tries to compare between the simulated and theoretical results at both large and small samples so that the estimation will be accurate and gives true results.It gives probabilistic results like how likely each outcome is and also provides graphical results which helps in communicating findings with others. MCS technique converts the uncertainities to probability distributions.While estimating the profit, it also investigates the risk involved in the process and it's additional feature of running multiple simulations using multiple randomly generated numbers always gives the best results. Also for profit optimization MCS technique considers coefficient of variation (CV) . It always tries to minimize the CV and maximize the inverse of CV. This is how simulation can be used in estimating profits.